Will the peso continue appreciating?
Some years ago, when I was involved in a money-transfer business to the Philippines (from the Netherlands), I noticed that the Philippine peso would appreciate during enrollment times (June and October), Christmas and elections. The peak during enrollment times and Christmas is due to the surge in Overseas Filipino (OF) remittances. As for elections, I suppose this is because the various candidates and their supporters send back dollars from their foreign bank accounts to help finance their campaigns.
The peso has strengthened against the dollar all year. This increase has followed the general trend of the dollar weakening against major world currencies. Because the Philippine economy is rather open, with minimal controls on the inflow and outflow of money, this trend of the weakening dollar internationally has quickly translated into the peso appreciating vis-à-vis the dollar. The role of OF remittances in this is significant, but it is not the only factor that has strengthened the peso. Other factors, such as the trade balance (i.e. exports minus imports), international investors, Filipino individuals and companies moving funds in and out of the country, government loans from abroad, also play a role. The interplay of these factors determine whether there is a net inflow or outflow of dollars from the country. The government can do little to stem the general trend, and trying to get a better exchange rate by a "remittance boycott" is also a futile exercise – the financial flows are too big for either to have an effect.
This December may be different
It seems that the interplay of financial flows this December may give a different result this time around. True to form, OF remittances will probably be quite high this December. However, other financial flows tend to be outward at this time.
One of the effects (and at the same time, a contributing cause) of the steady appreciation of the peso is that foreign companies in the Philippines have been postponing the transmission of their profits to their head offices in the expectation that these would be worth more later. At the end of the year (i.e. assuming that their fiscal year is the same as the calendar year), these companies could postpone no longer – they would have to transmit their profits home.
At the same time, international portfolio investors (i.e. those who buy stocks, bonds or derivatives) who invested in the Philippines in 2007 would also be conducting their end-of-year "window dressing" operations. This happens when, at the end of a year, investors sell off some of their investments and buy others in the hope of making their year-end report more "presentable". In the stock market, this means that smaller-cap stocks will be sold and blue-chip stocks bought. In the international framework of the portfolio investor, it may be that their Philippine investments would be seen as second-class, and this would mean that these would be sold and replaced with what they see as first-class investments.
We see the effect of year-end profit remittances and "window dressing" by US companies (and other companies whose main currency is the US dollar) on an international scale. This means that there are large amounts of dollars that are "returning" to the US. As a result, the US dollar has strengthened against most currencies in the last few days. The Philippine peso is directly and indirectly affected by this effect.
I don’t know how much the outward remittances would be in comparison to the inward surge of OF remittances. Thus, it is difficult to say for sure whether the net result would be that the peso would appreciate, or depreciate, in relation to the dollar. However, I tend to suspect that the outward flows would be greater than any increase in remittances this month. Thus, the peso would most likely weaken vis-à-vis the dollar. (it could strengthen up to 5-6 percent – thus, about 43.50:1 – maximum, but most likely less than this)
What next?
But whatever happens this December, I expect a return to the "normal" trend come January. The US dollar will continue to weaken in 2008 (and 2009), and this is a result of a powerful and practically unstoppable international trend. There are reasons to believe, though, that the rate of dollar weakening, and thus peso "strengthening" would be slower in 2008. The coming US recession, would ironically slow down the decline of the dollar, since this would mean a decrease in US imports. This same recession will also slow down Philippine exports, and maybe even the amount of OF remittances. Some other factors contributing to the slower decline would include: the lower projected government dollar loans, the lowering of Philippine interest rates would lessen foreign portfolio investments, and an increase in imports.
Rumors of the exchange rates reaching 30:1 next year are going around. I find this extremely hard to believe. What will more probably happen is that by November 2008, the peso:dollar rate will be in the range of 36:1 to 38:1. This will still be bad for OFs, but hopefully less shocking than 2007’s performance.
In the face of the prospect of a deteriorating dollar, OFs should take steps to minimize its negative effects. One way would be to try to exchange the dollars they earn into other currencies e.g. euro, yen, pound. This should be possible to do through the banking system – that is, by opening a foreign currency account. For those without access to such accounts, it may be a good idea to open a peso account in the Philippines on their own name, and then remit to themselves. And lastly, if at all possible, negotiating for higher salaries would of course be quite helpful.
***
About the author: Carlo Butalid is a Filipino living in Tilburg, the Netherlands, together with his wife and two daughters. He originally comes from Cebu City and works with the Philippine European Solidarity Centre (PESC-KSP) based in Utrecht, which is about an hour away from Tilburg. PESC-KSP distributes information about the activities of Philippine NGOs and the general Philippine situation, and networks among Philippine information and action groups in Europe. He also consider himself an Overseas Filipino activist - having been active in activities e.g. editing a Filipino community newsletter, campaigning for Overseas Filipinos right to vote, etc. See Carlo's blog at http://butalidnl.wordpress.com
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By CARLO BUTALID, NETHERLANDS
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The peso has strengthened against the dollar all year. This increase has followed the general trend of the dollar weakening against major world currencies. Because the Philippine economy is rather open, with minimal controls on the inflow and outflow of money, this trend of the weakening dollar internationally has quickly translated into the peso appreciating vis-à-vis the dollar. The role of OF remittances in this is significant, but it is not the only factor that has strengthened the peso. Other factors, such as the trade balance (i.e. exports minus imports), international investors, Filipino individuals and companies moving funds in and out of the country, government loans from abroad, also play a role. The interplay of these factors determine whether there is a net inflow or outflow of dollars from the country. The government can do little to stem the general trend, and trying to get a better exchange rate by a "remittance boycott" is also a futile exercise – the financial flows are too big for either to have an effect.
This December may be different
It seems that the interplay of financial flows this December may give a different result this time around. True to form, OF remittances will probably be quite high this December. However, other financial flows tend to be outward at this time.
One of the effects (and at the same time, a contributing cause) of the steady appreciation of the peso is that foreign companies in the Philippines have been postponing the transmission of their profits to their head offices in the expectation that these would be worth more later. At the end of the year (i.e. assuming that their fiscal year is the same as the calendar year), these companies could postpone no longer – they would have to transmit their profits home.
At the same time, international portfolio investors (i.e. those who buy stocks, bonds or derivatives) who invested in the Philippines in 2007 would also be conducting their end-of-year "window dressing" operations. This happens when, at the end of a year, investors sell off some of their investments and buy others in the hope of making their year-end report more "presentable". In the stock market, this means that smaller-cap stocks will be sold and blue-chip stocks bought. In the international framework of the portfolio investor, it may be that their Philippine investments would be seen as second-class, and this would mean that these would be sold and replaced with what they see as first-class investments.
We see the effect of year-end profit remittances and "window dressing" by US companies (and other companies whose main currency is the US dollar) on an international scale. This means that there are large amounts of dollars that are "returning" to the US. As a result, the US dollar has strengthened against most currencies in the last few days. The Philippine peso is directly and indirectly affected by this effect.
I don’t know how much the outward remittances would be in comparison to the inward surge of OF remittances. Thus, it is difficult to say for sure whether the net result would be that the peso would appreciate, or depreciate, in relation to the dollar. However, I tend to suspect that the outward flows would be greater than any increase in remittances this month. Thus, the peso would most likely weaken vis-à-vis the dollar. (it could strengthen up to 5-6 percent – thus, about 43.50:1 – maximum, but most likely less than this)
What next?
But whatever happens this December, I expect a return to the "normal" trend come January. The US dollar will continue to weaken in 2008 (and 2009), and this is a result of a powerful and practically unstoppable international trend. There are reasons to believe, though, that the rate of dollar weakening, and thus peso "strengthening" would be slower in 2008. The coming US recession, would ironically slow down the decline of the dollar, since this would mean a decrease in US imports. This same recession will also slow down Philippine exports, and maybe even the amount of OF remittances. Some other factors contributing to the slower decline would include: the lower projected government dollar loans, the lowering of Philippine interest rates would lessen foreign portfolio investments, and an increase in imports.
Rumors of the exchange rates reaching 30:1 next year are going around. I find this extremely hard to believe. What will more probably happen is that by November 2008, the peso:dollar rate will be in the range of 36:1 to 38:1. This will still be bad for OFs, but hopefully less shocking than 2007’s performance.
In the face of the prospect of a deteriorating dollar, OFs should take steps to minimize its negative effects. One way would be to try to exchange the dollars they earn into other currencies e.g. euro, yen, pound. This should be possible to do through the banking system – that is, by opening a foreign currency account. For those without access to such accounts, it may be a good idea to open a peso account in the Philippines on their own name, and then remit to themselves. And lastly, if at all possible, negotiating for higher salaries would of course be quite helpful.
***
About the author: Carlo Butalid is a Filipino living in Tilburg, the Netherlands, together with his wife and two daughters. He originally comes from Cebu City and works with the Philippine European Solidarity Centre (PESC-KSP) based in Utrecht, which is about an hour away from Tilburg. PESC-KSP distributes information about the activities of Philippine NGOs and the general Philippine situation, and networks among Philippine information and action groups in Europe. He also consider himself an Overseas Filipino activist - having been active in activities e.g. editing a Filipino community newsletter, campaigning for Overseas Filipinos right to vote, etc. See Carlo's blog at http://butalidnl.wordpress.com
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By CARLO BUTALID, NETHERLANDS
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